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22 comments:
Roger,
Really appreciated the explanation of how you are dealing with the current volatility and how you handle your portfolios in general. You're a calming influence (especially relative to CNBC) and help keep me focused on not making emotional decisions.
Thanks again, Roger. I listened to the talking financial heads on Fox this morning, and they all seem to have different crystal ball readings. It is really a crap-shoot.
I think the 15%cash and 5% short positioning is prudent. It seems like you are really actively managing ETF equities in large part, and that is working well for you and your clientele. Do you see a time coming when "actively managed" ETF's come online, and if so, how will that affect your approach, assuming that those management expenses will also go up?
Also.....do you use a stop loss on the short ETF's, since I got hammered on my stopped out 8% during the recent gyrations?
Scoot
Thanks for any thoughts.
Roger,
A lot of what I read and hear looks like we are headed in to a rally this week. That seems reasonable to me.
The most interesting comment I heard this week was that the sub prime problem has become a full blown credit crunch, thus the injections of cash by the Fed and ECB. This will lead to an unwinding of credit especially in Hedge funds. Hedge funds have gotten so numerous and so large of recent years with lots of leverage. The unwinding of leverage by hedge funds will lead to a bear market for equities.
Basically the banks are going to take a new standard to lending. Actually some might argue it will be an OLD and reasonable approach to lending, but it will be different than what has been happening in the last couple of years. I would like to get your impressions on this potential for hedge fund unwinding?
You say you want to "smooth out the bumps", yet I noticed on our visit Thursday that the road leading to your house remains unpaved!
Scoot, i use mostly common stocks. As far as actively managed ETFs they already exist; closed end funds. Not to be too flip but I never understood why this matters. There is of course the mechanical diff WRT to premium/discount but beyond that I do not see the difference.
I use stop orders here and there, usually on part of a position after it has gone up and only for stocks that I think lend themselves to stop orders. The 8% stops is not something i ever do because depending on the circumstance it could easily be a bad sale and then what do you buy and when? Broad use like that is not for me.
hedge funds have had forced unwinds before, not really on a wide spread basis very often. it might be going on now for all we know. I think the worst case reaction would be a fast decline in the market (which is why I wonder if it has been happening already).
As I have mentioned fast declines, regardless of why is not someting I worry about.
This is not to say it can't be down fast, snap back fast and then down slow which would be more troublesome for the market.
rally this week? can I ask if you are factoring in the Fannie news?
Larry,
the bullets didn't deter you either, lol.
Your comments about "up after 10 years" etc, are meaningless, as you have not compensated the results for the effects of inflation. And using a real estimate of inflation, not the USG lies. You have to generate about 10% per year just to keep even IMHO. So you either actively trade and take big risks, or you eat the dust of those who do.
if i wasn't clear the context is more of a 60,000 foot view. active trading might be right for you of course but the vast majority people don't want to actively trade.
I'm not sure why a buy and holder has to eat your dust? if you can get better returns by trading actively, great, but what does that have to do with anyone who does not trade?
S&P 500 returned 12% annualized for the past 5 years. So you could just buy and hold a S&P 500 Index fund and have 12%/year without trading. However, during 2002 and 2003 there were sizable corrections. My goal in portfolio management (like Roger's) is getting similar returns but with a smoother ride. Even with the wide market gyration lately S&P 500 has not lost more than 6.4%, thus no major defensive posture is needed. However, if it drops another 4% with increased volatility(I don't think it will happen next week), then more cash and more double shorts are in order.
In real (annually compounded & inflation adjusted) terms the S&P500 is down about 19% from it's 2000 peak. Whether an active trader can beat that is another question; as a statistical matter some do, most don't.
The main point is to develop a strategy that either reduces volatility or takes advantage of it; doing both requires (at least) two separate portfolios w/ strategic models to match.
Just to reiterate: Investors typically do not earn simple percentage returns, they earn real compounded returns, so citing the simple increase of an index over any span of time is misleading at best; e.g., saying the S&P500 gained y% over x number of years tells you surprisingly little about the actual, real-world returns of any given S&P500 investment vehicle.
Regarding your portfolio management strategy.
If I understand, you try to reduce portfolio volatility in times of high market volatility, and although you didn't mention this, you must attempt to increase portfolio volatility in times of low market volatility??
Just curious if there is any evidence that this enhances returns, or that there are actually trading rules that are successful at predicting future volatility?
Yale's Swenson concludes that following a strategy like this is the primary reason that most retail investors are unable to produce results that are on par with market averages.
either i wasn't clear or you didn't understand.
i said in the video that in thinking the cycle will end much sooner than later i want to reduce volatility. I am pretty sure i didn't say i reduced volatiltiy because i expected the market be more volatile.
As I also mentioned in the video it appears that the goal of lower volatility has been working out so far.
I am in no way trying to tactically game volatility of the market, this is more of a how the market works thing. The risk of bear market starting is higher now after more than 4 years of bull market.
I read the question as asking about short term "gamma plays." From this I think you might be a new reader. To the extent you care, I would suggest spending a little time with past posts.
Great v-post Roger,
Sorry for not commenting more frequently lately but I started a new job a couple weeks ago and to say "it's been hectic" would be an understatement.
My timing model is now at 1.5 or 80% long. On 8/8 I was down to 60% long and I adjusted through double short positions which I have just sold.
The key thing I've been watching are the sentiment models. They are screaming buys right now and are a strong counterbalance to my trend indicators in which 3 out of 4 are bearish.
Although my model is only signaling 80% long I haven't felt this bullish is a long time. The fear (media headlines), the volatility, the Thursday climax...all point to a higher market over the intermediate term (1-3 months) imo. And even though your blog is gaining in popularity, I don't believe I've ever seen a post getting 48+ comments before. That has to be some sign of emotional excess. Geez, just the fact that the Nusbaum clan converged on your cabin has to be a sign of something!
To RW,
The lower investors' returns vs S&P 500 or any other indices, according to Morningstar, are due to poor timing of entry/exit, frequent trading and the like. If you did hold S&P 500 for the past five year without trading you would have got the published return. Thus, having a large part of your portfolio fixed and a smaller part flexible could be beneficial.
thanks TomK. New job? hope that's a good thing so congrats on that.
As far as feeling bullish, every once in a while I get a hunch about the short term for the market that turns out to be right but this is not one of those times, lol.
Roger, you suggest that you are not gaming volatility, and that I should read your past posts.
Go back to you BNP Paribas post. That is where you talk about reducing volatility in your portfolio.
Again, your strategy seems backwards. Classic "sell in the panics".
i use the 200 DMA as a point to start to get defensive, philosophically this is what i believe. and I think the post you cite is is consistent.
from the fourth paragraph; Late in the cycle and with a financial something or other that is an easily definable and visible threat is a time to underweight volatility
you can think of it as you want of course.
Anon 4:59, no need to factor any of the items Morningstar mentions in its study, so I didn't. In fact, calculating a simple interest return on an index over multiple years lacks legitimacy even if one assumes frictionless trading (no slippage or commissions involved in reinvestment of dividends for example), no expense ratio (normal management fees, etc) and no taxes.
In practice it is not possible to avoid friction and other normal loss factors but for the purposes of simplifying calculation they can be ignored because volatility virtually assures an investor will not actually receive the simple % return of any given passively held index even if inflation is not factored in also.
This is not an argument against a core holding, quite the contrary. It is, as you imply, an argument for a tactical (flexible) component to compensate for friction; a well developed savings plan can be part of that compensatory mechanism naturally, it doesn't have to mean active trading necessarily.
To RW,
In a tax defered account, VFIAX(Vanguard 500 index Admiral Shares) differs from S&P 500 index by 0.04% for 5 year record. To most people they would happily accept this being insignificant. If one has to consider tax conquence for a taxible account, then the tax efficiency of the investment,indeed is an significant item of contention. Again, less trading will help preserve the return.
It seems to me that smoothing out the ride not only entails selling and shorting, but also reallocating some assets to those opportunities less likely to be infected by whatever contagion is going on here--many tech, defense, healthcare, and consumer staples stocks are (gasp) actually going up.
history would agree about staples and health. one point i would add is that when you shave off one sector in your portfolio it gives the others a little more prominence, in a manner of speaking.
See my comments were deleted. How convienent!
OK. But you say it's a free blog.
Hope you lost your arse as I predicted. Nother 200 off today. What kind of wet towel snap from college dats to the face doyou need to see the complete reversion and implosion? I'll be happy to snap that towel.
Screw your authentication!
Great advice; meaningless blather as to the debackle. Forrest for the treees; gross error.
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